The ability of past earnings and operating cash flows to predict future operating cash flows

The FASB in SFAC NO.1 has asserted, without proof, that information about an enterprise’s earnings based on accrual accounting generally provides a better indication of a company’s ability to generate favourable cash flows than information cash flows themselves. This study tests that assertion, empirically. For this reason, a sample of 44 companies listed in Tehran Stock Exchange (TSE) during the period of 1360-1385 was examined. We employed the Panel Data regression framework and also extended our study through an industry analysis. The test results provide empirical evidence supporting the FASB contention. The industry analysis evidence shows that in some industries earnings, and in others operating cash flows, are better predictors of future operating cash flows.